Government not keen to lift ban on Guar trading

Commerce dept fears price volatility & speculation will resurface if futures trading, banned in March this year, is allowed again.

NEW DELHI: The commerce department is not in favour of re-listing of guar gum and guar seed on the forwards market despite the commodities market regulator suggesting a re-think on the ban.

A senior official told ET that if futures trading is allowed, prices of both guar gum and guar seed will soar since the demand and supply base of the two commodities is narrow. Gaur gum and guar seed are largely exported for use in oil and gas industry.

"We do not think there is enough reason to believe that price volatility and speculation will not resurface if future trading in guar gum and guar seed is re-launched. We cannot afford to take a chance," the official said.

Forward Markets Commission, the commodities market regulator, had banned futures trading in the two commodities in March this year following speculation and price volatility.

But with prices of the produce, used as a thickening agent for oil and gas extraction, falling more than 50% since then, the FMC is ready to take a re-look at the ban without committing on whether it would be revoked.

FMC chairman Rakesh Abhishek had recently said that the regulator was consulting the Directorate General of Foreign Trade on lifting the ban on futures trading of guar gum.

He, however, stressed that FMC was not in a hurry as its priority was to ensure a transparent platform for price discovery and hedging. The commerce department, however, seems sure that it wants the ban to stay.

"On economic grounds, the listing of any commodity is good as it leads to price discovery but this logic does not apply to guar gum as demand and supply base for the produce is thin," the commerce department official said.

Formal discussions between the DGFT and the FMC on the issue are yet to begin, the official added.

The demand for guar gum and guar seed, originally used as cow feed in the country, is mainly from the oil and gas industry. Its supply is also from a small group of farmers.

"In such cases, futures trading can actually distort the market as speculation can cause prices to shoot. This was witnessed earlier this year when prices of guar gum increased more than four-fold over a few months," the official added.

However, due to high price realisation last year, farmers have increased acreage of guar gum and seed.

According to industry estimate, output is likely to rise to 2.5 million tonne in 2012-13 from 1.5 million tonne in the previous year. Spot prices have come down to about $6,500 per tonne on expectations of a bigger crop.